Golden Parachutes and the Wealth of Shareholders

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Golden Parachutes and the Wealth of Shareholders. Lucian Bebchuk (Harvard) Alma Cohen (Tel-Aviv, Harvard) Charles C.Y. Wang (Stanford, Harvard) Yale SOM, November 2010. Motivation. GPs have attracted much debate and attention since the late 70s and early 80s - PowerPoint PPT Presentation

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  • Golden Parachutesand the Wealth of ShareholdersLucian Bebchuk (Harvard) Alma Cohen (Tel-Aviv, Harvard) Charles C.Y. Wang (Stanford, Harvard)

    Yale SOM, November 2010

    GP and the Wealth of Shareholders (Bebchuk, Cohen, Wang)

  • *MotivationGPs have attracted much debate and attention since the late 70s and early 80sCongress in 84 imposed substantial tax penalties on large GPs to discourage their useRise in shareholder precatory resolutions opposing GPs President Obama and Treasury Secretary Geithner aim to take the air out of golden parachutes2010 Dodd-Frank Act mandates shareholder advisory votes on all adoptions of GP by public firms.

    We seek to inform this debate by investigating how GPs are associated with:Acquisition outcomes: likelihood, premiums, and expected premiums.The evolution of firm value over time.

  • *Main FindingsGPs and Acquisition Outcomes: GPs positively associated with likelihood of receiving acquisition bid and of being acquired GP negatively associated with acquisition premiaGPs positively associated with expected premia from an acquisition.

    GPs and Evolution of Firm Value:Firms adopting GPs tend to have lower Tobins Q value already in the IRRC volume preceding the adoptionThe value of firms adopting GPs but their value continues to erode during the inter-volume period of adoption and continues to erode subsequently.

  • *Literature ReviewThere is substantial empirical literature on GPsEvent studies around GP adoptions, with mixed results(Lambert & Larcker 85; Born, Faria, & Trahan 93; Mogavero & Toyne 95; Hall & Anderson 97)Unlike these studies, we examine the evolution of value in a much longer window.

    Evidence of negative correlation between GP and Q, but does not indicate timing when the negative correlation arises(Gompers, Metrick, Ishii 03; Bebchuk, Cohen, and Farrell 09)

    Literature on the direct effects of GPs on acquisition likelihood and premia (but not on the expected premia) but with mixed results. (Machlin, Choe, and Miles 93; Born, Faria, &Trahan 93; Cotter and Zenner 94; Hall and Anderson 97; Lefanowicz, Robinson, and Smith 00; Fich, Tran, and Walking 09)

  • *Data DescriptionData on Golden ParachutesInvestor Responsibility Research Center (IRRC) 8 Volumes: 1990, 1993, 1995, 1998, 2000, 2002, 2004, 2006Tracks corporate governance provisions for 1400~1800 largest firms

    Benefits of IRRCBroad coverage (> 90% of total U.S. market cap) Long time seriesData on other governance measures (poison pill, staggered board, etc)

    Weaknesses of IRRCNo exact GP contract details and size of parachuteOnly has snap-shots every 2~3 years, dont have exact adoption dates

  • *Summary Statistics IStock of GPs in each IRRC volume rising over time

    IRRC Volume# Firms in IRRC VolumeFirms w/ GP% of Firms w/ GP19901,46774050.4%19931,46378053.3%19951,49680253.6%19981,913106055.4%20001,886122364.9%20021,894128267.7%20041,982145573.4%20061,897147377.7%

  • *Summary Statistics IIAdoption of GPs in each IRRC volume averages to 22.4% of eligible adopters

    YearsTotal FirmsFirms with no GP beginning of periodNum of Adopters% of Adopters1990~19931,27263910115.8%1993~19951,3446417912.3%1995~19981,21459414223.9%1998~20001,66776821427.9%2000~20021,41653316030.0%2002~20041,65452913124.8%2004~20061,65645510022.0%

  • *Summary Statistics IIIIncidence of acquisition positively associated with GPsBid (acquisition) incidence is43% (52%) greater for GP firms over Non-GP firms

    % Receiving Initial Bid in the Next Calendar Year% Acquired in the Next Calendar YearNo GPGPDiffNo GPGPDiff19904.64%4.70%+2.48%2.35%-19912.71%3.63%+1.86%2.57%+19922.96%3.42%+2.79%3.11%+19933.24%4.58%+1.87%2.08%+19945.76%8.05%+1.92%5.46%+19953.97%7.45%+2.64%4.41%+19964.78%9.87%+3.92%8.56%+19978.41%9.08%+5.01%7.32%+19987.85%12.74%+6.25%10.24%+19996.17%9.68%+6.47%9.43%+20003.66%5.14%+3.66%5.57%+20011.94%2.64%+1.08%2.75%+20023.54%3.90%+2.29%2.57%+20033.21%4.75%+3.00%4.02%+20044.27%6.06%+1.76%4.58%+20056.98%8.08%+5.43%4.81%-20065.28%9.80%+5.59%8.16%+Mean4.7 % 6.7 %2.0 %***3.4 %5.2 %1.8 %***

  • *GP and Likelihood of Acquisitions GP associated with higher bid/acquisition likelihoodNote1: Marginal FX reported

  • * Note 1: Marginal FX reportedNote 2: Only interaction terms reported. Main effects and controls suppressed

    Generality of the Association between GP & Acquisitions II

  • *Interpreting the Association between GP and Acquisitions IPositive association between GP and acquisition likelihood result from Incentive (Causality) EffectPrivate Information Effect (Lambert-Larcker, 85)

    We test whether the effect is entirely driven by private information using the timing of GP adoption If managers adopt GP in anticipation of acquisition bid relationship with acquisition should be driven by newly-adopted GPs

  • * Diff = -0.003PVal= 0.324Note 1: Marginal FX reportedNote 2: Estimation using HHI to control for industry yields similar resultsInterpreting the Association between GP and Acquisitions II

  • *

    GP and Acquisition Premium

  • *Interpreting Association between GP and Acquisition Premium IExplanations?GP decreases managers threshold, making manager more receptive to acquisitions* Weakens bargaining position in acquisitions that will take place regardless of a GP* Introduces additional (lower-value) acquisitions.

  • *Alternative Explanations? GP as a compensation-shifting tool (Choi 04)Shareholder shifts compensation burden to buyer in the event of acquisitionLowers shareholder return in acquisition, but benefits shareholder ex-ante by lowering managers non-acquisition compensationBut, model also predicts GPs decrease acquisition likelihood

    Disloyal managers trading off premiums and private benefits (Hartzell, Ofek, and Yermack 04)Certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals in exchange for lower premiumThe GPs we study in our data set are adopted ex ante

    Interpreting Association between GP and Acquisition Premium II

  • *

    GP and Expected Acquisition Premiums

  • *GP and Firm ValueEarlier literature has documented the negative association between Q and GP (GIM 03; BCF 09)However, the timing in the deterioration of firm value is unclear.

    We investigate whether the negative association arisesPrior to adoption of GP?In period between IRRC volumes around the adoption of GP?After adoption of GP?

    To answer these, use inter-volume changes in GP

  • *Adopters have low Q prior to adoption of GP Relative to non-adopters, future GP adopters Q 4~5% lower

    Note:Future GP Adopter is an indicator where1: a firm that adopts GP by the next IRRC volume0 indicates firm that does not have GP in current and next volume

  • *Q continues to decrease around adoption I

    Relative to non-adopters, future GP adopters experience volume-to-volume (over next 2~3 yrs) change in Q 4~5% lower

    Note: Future GP Adopter is an indicator where1: firm adopts GP by the next IRRC volume0: firm does not have GP in current and next volume

  • *Q continues to decrease around adoption II

    The long-term event window (2~3 years) surrounding GP adoption associated with a 4.5% decrease in Q

    Note: This is a changes regression run on the full set of firms that show up in two consecutive volumes

  • *Q continues to drop for long-term adopters

    Relative to LT non-adopters, LT GP adopters experience volume-to-volume (2~3 years) change in Q about 4~6% lower

    Note: LT GP Adopter is an indicator where1: firm has GP in the preceding, current, and next IRRC volumes0: firm does not have GP in the preceding, current, and next volumes

  • *Stock returns decrease prior to adoption

    On annualized basis VW: -6.85% EW: -4.12%

    Note on portfolio formation: Long future adopters i.e., firms with no GP in current and next IRRC volume, adopts by 2 IRRC volume from nowShort long-term non-adoptersi.e., firms with no GP in current and subsequent 2 IRRC volumesRebalance monthly Update portfolio whenever new governance information from IRRC becomes available

  • *Stock returns decrease 2~3 years around adoption

    On annualized basisVW: -4.35% EW: -2.37

    Note on portfolio formationLong firms with no GP in current IRRC volume and adopts by the next IRRC volumeShort firms with no GP in current and subsequent IRRC volumesRebalance monthly Update portfolio whenever new governance information from IRRC becomes available

  • *Stock returns decrease after adoption

    Note on portfolio formationLong firms with GP in current and subsequent IRRC volumesShort firms with no GP in current and subsequent IRRC volumesRebalance monthlyUpdate portfolio whenever new governance information from IRRC becomes available

    On annualized basis VW: -4.35% EW: -3.31% On annualized basis VW: -3.77% EW: -2.84%

  • *Interpreting Results on GP and Firm ValueFirms have low Q and declining returns prior to adoption of GPConsistent with selection

    Firms have declining Q and stock returns in the long-term event window (2~3 years between IRRC volumes) around GP adoption Consistent with selectionConsistent with managerial slack (Shleifer and Vishny 98; GIM 03; BCF 09)

    Firms continue to experience decrease in stock returns (and Q) post-adoption, relative to non-adoptersConsistent with managerial slack(Shleifer and Vishny 98; GIM 03; BCF 09))Not consistent with GP inducing LT focus (Stein 98)

  • *ConclusionWe contribute to the empirical evidence on the long-term implications of GPs using IRRC dataGPs are positively associated with acquisition likelihood, negatively associated with premiums in the event of an acquisition, and positively associated with (unconditional) premia from an acquisition.

    Firms adopting GPs have lower value to begin with but their value continues to erode during the inter-volume period of adoption and subsequently .

    Congress enacted 280G and 4999 of the Internal Revenue Code

    TOPIC OF GP REMAINS AN ACTIVE AND CONTROVERCIAL TOPIC

    Late 70s and early 80s, during which period the use of GPs became popularized as a result of an unprecedented wave of corporate takeovers. In particular, a lot of debate over the ethics and legality of such a form of payment early on. Shareholders sued for illegal misappropriation of corporate funds Ousted management sued for refusal to pay GPSee Hankinson (2005) and Mullane (2009) on recent reviews of the legislative history. Precatory resolutions (unlike binding resolutions) are shareholder resolutions, or proposals submitted by shareholders for a vote at the companys annual meeting, that are non-binding in the sense the voting on these more closely resembles a poll than it does a (binding) referendum. Still, media coverage of voting on shareholder resolutions tends to focus on wheher the proposal received a majority of votes, which occurs in a very small but increasing proportion of cases. Note that shareholder resolutions have been important part of activist campaigns in a few cases. 4. For example, SEC in 84 required mandatory disclosure of GP adoption, and the adoption of Deficit Reduction Act of 84 (where the Internal Revenue Code changes were made. 5. House Bill (Barney Frank), titled Corporate and Financial Institution Compensation Fairness Act of 2009, has been referred to Senate Committee after being received from House, but not yet taken up. (Frank is chairman of the House Financial Services Committee, Congressman of Mass)

    *Pervasive in all types of firms and not driven by a particular sub-type of firms that we examined.

    CHECK TO SEE IF IT IS THE CASE THAT, GIVEN A BID, LIKELIHOOD OF SUCCESS IS HIGHER WHEN THERE IS GP

    Make sure with Lucian that the INCENTIVE effect story is part of this. I dont think that we really test for this In unreported results, GIVEN THE PRESENCE OF A BIDDER (either current or next year), the presence of GP does NOT increase the likelihood of completion. This could be driven by the fact that *On identifying the announcement wealth effect: There is mixed evidence on the market reaction to GP announcements. But Narayanan (98) suggests that there are 3 reasons why this might be true, relating to the data:

    Theres a lag between when GP is public knowledge (firms have to disclose info in the first proxy statement filed with the SEC after adoption) and when the information is reported in the financial press. (Papers differ on whether to use proxy filing date or financial press date)Very few GP adoptions are reported in financial pressUse of proxy statements raises confounding problem since in each proxy statement

    The problem with the earlier studies on price response to adoption (as Machlin et al noted), is that stock return behavior around GP adoption does not provide information about the source of increase in shareholder wealth. For example, one source could be a greater likelihood of takeover and/or increase in premium (so, increase in expected premium). Another source could be aligning of managerial incentives.

    The other problem with event studies, as noted by Gompers, Metrick, and Ishii (00), is that event-studies methodology face the difficulty that results are driven by contemporaneous events / conditions at the firm (e.g. adoption of GP may be driven by the change in corporate governance structure or provide a signal of managers private information about impending takeover bids).

    Cotter and Zenner (1994) paper finds that only the gains on managers share ownership, not GP payments, have a significant effect on probability of acquisition, NOT GP!

    There are also papers that find NO EFFECT on shareholder wealth, when you take out firms that are already in play at the time of GP adoption. (Born and Trahan 93) They conclude that this supports the hypothesis that GP SIGNALS increased probability of takeocer

    Narayannan finds no evidence of value-destruction after the adoption of GP.

    Note: I suspect that one of the reasons why the earlier papers did not find increases in takeovers is because they do not control for other governance / takeover readiness measures, like the presence of poison pills, etc *These data are derived from a variety of public sources including corporate bylaws and charters, proxy statements, annual reports, as well as 10-K and 10-Q documents filed with the SEC.

    The IRRCs sample expanded by several hundred firms in 1998 through additions of some smaller firms and firms with high institutional-ownership levels.

    We divide them into five groups: tactics for delaying hostile bidders (Delay); voting rights(Voting); director/officer protection (Protection); other takeover defenses (Other); and state laws (State).*GPs are prevalent and have become increasingly prevalent, at least among the large firms. % of Firms in the S&P 1500 with GP has steady increased.

    Note: The IRRCs sample expanded by several hundred firms in 1998 through additions of some smaller firms and firms with high institutional-ownership levels.

    *Remember, these numbers are not exactly comparable, since they are over the next 2~3 years.

    We find the percentage of firms, covered by IRRC in two consecutive volumes, that adopt golden parachutes rise steadily from 1990 to 2002, from 15.81% to 30.02%, and declines thereafter to 21.98% in the 2006 volume. On average (weighted), 22.29% of the firms covered in 2 consecutive IRRC volumes that did not have a golden parachute initially adopt a golden parachute in the inter-volume period.

    What about DIS-ADOPTERS?Of the number of firms that have GP in the beginning of 2 volumes (and appear in the subsequent), the % of droppers are. 1990~1993: 9.32% (59 of 633) 1993~1995: 6.26% (44 of 703) 1995~1998: 6.13% (38 of 620) 1998~2000: 2.89% (26 of 899) 2000~2002: 1.81% (16 of 883)2002~2004: 2.76% (31 of 1125) 2004~2006: 1.42% (17 of 1201) Average: 4.37% Median: 2.89%

    The IRRCs sample expanded by several hundred firms in 1998 through additions of some smaller firms and firms with high institutional-ownership levels.

    *Table II displays the incidence of initial bids and completed acquisitions of firms with and without golden parachutes. We find a consistent pattern that a higher percentage of firms with golden parachutes receive bids as well as being acquired in the next year. Using a paired t-test we find that over the whole period the incidence of initial bids and acquisitions is significantly higher at the 1% level for firms with golden parachutes in the period 1990 to 2006. (Note: Here we use forward fill)*0. Recall in the summary statistics we find that the presence of GPs increases acquisition likelihood by 40%~50% (or 2~3 ppts). Now, in this setting, half of the effect goes away. But still economically significant, about a quarter.

    1. Columns 1 vs 2 and 3 vs 4 differ on industry control. In one specification we use Herf index as industry control and on the other we use industry fixed effects.

    2. The fact that the results for takeover likelihood is consistent with bid likelihood is not surprising since 70% of the auction sequences identified in our data are eventually completed, with an average length to completion (from initial bid) of 167 days.

    3. While a 1 ~2% increase in the bid and takeover likelihood may not seem large, to put these probabilities in context, we normalize them by the mean percentage of firms that receive acquisition bids (5.96%) and that are acquired in a year (4.54%), respectively.

    We estimate the marginal effect of GP on bid likelihood and takeover likelihood for an average firm (i.e. one that takes on the mean values in the control variables) to be 1.51% and 1.29%, respectively; the marginal effects are statistically significant at the 1% level.

    We find that having a golden parachute is associated with a 25.4% proportional increase in the likelihood of takeover bids and a 28.40% proportional increase in the likelihood of acquisition, which illustrate an economically significant effect of GP on the baseline risk of takeover. THIS IS AN ECONOMICALLY SIGNIFICANT INCREASE!

    It is comforting to find that the variables that should be associated with the ex-ante likelihood of acquisition work in the right direction. Low Q firms in an industry, small firms in an industry, and highly levered firms in an industry, and firms from most competitive industries are morel likely to receive a bid or acquisition. Delaware firms (consistent with Daines 2001) are also more likely to be acquired. This is consistent with the theory that Delaware corporate law facilitates the sale of public firms and improves firm value.

    6. On firm fixed effects: In a Probit we cant really estimate firm fixed effects incidental parameters problem as well as computationally difficult (perfect classifiers). But we can estimate consistently industry and year fixed effects. When we move to linear model and estimate fixed effects our results do not change.

    Note on Herfendahl Index: Firms from industries with less competition (higher HHI) is less likely to experience takeovers; and those in more competitive industries (lower HHI) is more likely to experience takeovers.

    Note on CONDITIONAL ON BID: In unreported results, I find that controlling for the presence of a bid, the likelihood of a takeover does not increase. This is also consistent with the fact that the time to bid completion (among set of completed acquisitions) does not differ between GP and non-GP firms.

    Note on Variable Definitions: Industry relative refers to relative to the industry medianInd-Rel MCAP = MCAP / Median MCAPLog(Ind-Rel Q) = Log(Q / Median MCAP)Ind-Rel D/A = (D/A) / (Median D/A)

    Our valuation measure is Tobins Q, which has been used for this purpose in corporategovernance studies since the work of Demsetz and Lehn [1985] and Morck, Shleifer, and Vishny [1988]. We follow Kaplan and Zingales [1997] method for the computation of Q (details are listed in Appendix B) and also compute the median Q in each year in each of the 48 industries classified by Fama and French [1997].

    Here, we have AVERAGE Q (instead of marginal Q)Q = Market Value of Asset / Book Value of AssetsMarket Value of Assets = book value of assets + market value of common stock (book value of common stock + balance sheet deferred taxes). Book value of assets is supposed to be the replacement cost

    If a firm is worth more than its value based on what it would cost to rebuild it, then excess profits are being earned. These profits are above and beyond the level that is necessary to keep the firm in the industry.

    For example,a lowQ(between 0 and 1) means that the cost to replacea firm'sassets is greater than the value of its stock. Thisimplies that the stock is undervalued.Conversely, ahigh Q(greater than 1) implies that afirm'sstock is moreexpensive than the replacement cost of its assets, which implies that the stock is overvalued.Thismeasure of stockvaluationis the driving factor behind investment decisions in Tobin's model.

    Note: The medians are computed using compustat, which encompasses basically the universe of firms. In particular, it will have all the small companies as well.

    *Here we test a couple of hypotheses. The association between GP and acquisitions are present in each of the categoriesThe magnitudes of the associations are no different between the subgroups within each category

    What we find is thatThe association is general across different types of firmsThe association is no stronger in the subgroups within each category*We find that having a golden parachute is associated with a 25.4% proportional increase in the likelihood of takeover bids and a 28.40% proportional increase in the likelihood of acquisition, which illustrate an economically significant effect of GP on the baseline risk of takeover.

    We estimate the marginal effect of GP on bid likelihood and takeover likelihood for an average firm (i.e. one that takes on the mean values in the control variables) to be 1.51% and 1.29%, respectively; the marginal effects are statistically significant at the 1% level.

    While a 1 ~2% increase in the bid and takeover likelihood may not seem large, to put these probabilities in context, we normalize them by the mean percentage of firms that receive acquisition bids (5.96%) and that are acquired in a year (4.54%), respectively. *0. Here we report marginal effects.

    Notice that since we use volume-by-volume data, having acquisition by next IRRC volume is more meaningful (rather than receiving bid by next year)

    We do not show a specification where we use HHI as industry control here, but in unreported results they are similar (although the Fresh GP coeff is a bit larger) Really all that matters here is that the coefficient on old GP is positive and significant. The fact that the magnitudes are not different is a little of an aside.

    Here we see that there is a significant relationship between GP and takeovers whether you are young or old. This implies that the story cannot be the only story. So, reality is that BOTH effects could be happening, or that the presence of GP can also bring about a higher takeover likelihood.

    5. Note: If signaling is what is driving the effect, we should see the entire association concentrated around fresh GPs. To the extent that signaling is not driving the result, the difference in the effects can tell us the relative importance of the competing hypotheses. *Control for Deal Characteristics: Hostile Bid, Tender Offer, Toehold, Termination FeeCHECK IF WE REMOVED DUALCLASS AND REITS!!!3Log(Time) captures the amount of time that was passed from initial bid to consummation.

    Note: Perhaps we should be looking at the control premium. But in a way weve controlled for this by controlling for the acquirers toehold on the firm.

    . The mean (median) non-stock transactions in our dataset earn a premium of 33.4 (30.21) percentage points. The marginal effect of GP on average (median) premium is a decrease of 6.03 (9.29) percentage points, which amounts to a 18.05% (30.75%) discount.

    While on the surface this result may suggest that GPs do indeed give managers disincentives to bargain a better deal for shareholders, there are a few other possibilities that may explain the result. One possibility is that the observed decrease in premia might be extracted by managers by negotiating a better GP package during the takeover process. Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals; furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia. Yet this result may not necessarily indicate that GPs are detrimental to shareholder wealth in acquisition deals. For example, another explanation for the result might be that the presence of GP increases the set of bidders for a firm, particularly bidders who are willing to pay a premium on the low (but positive) margin. Consider the following model. *CAN ADD A GRAPH HERE FOR INTUITION HAVE A LINE THAT SAYS the THRESHOLD WITH GP and ONE LINE THAT SHOWS THE THRESHOLD WITHOUT GP

    GP affects incentives in terms of QUANTITY of acquisition (likelihood), but the quality of acquisitions is negative.

    FIND A DISTRIBUTION OF THE TIME TO COMPLETION AND THE TOTAL NUMBER OF BIDS CONSIDERED.

    Note: We find that it is the presence of other takeover defenses that LENGTHEN the time to completion, but GP itself does not have a significant impact controlling for other takeover defenses. *Effort is a bit different. It COULD be related to the threshold. For example, one could think of effort as a negative function of the proposed premium from the threshold. So, in this way, the initially offered premium may also matter.

    In the previous, the threshold is EX-ANTE, independent of the effort. But in our analysis, assuming that the offer premium is independent of the threshold, then we do expect that the average premium would be lowered.

    Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals. Furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia.Some, like Machlin et al, might call this the moral hazard problem of GPs. Ours says that the presence of GPs EX-ANTE lowers the average premium earned. Which is different from the evidence that Hartzell et al give.

    *Effort is a bit different. It COULD be related to the threshold. For example, one could think of effort as a negative function of the proposed premium from the threshold. So, in this way, the initially offered premium may also matter.

    In the previous, the threshold is EX-ANTE, independent of the effort. But in our analysis, assuming that the offer premium is independent of the threshold, then we do expect that the average premium would be lowered.

    Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals. Furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia.Some, like Machlin et al, might call this the moral hazard problem of GPs. Ours says that the presence of GPs EX-ANTE lowers the average premium earned. Which is different from the evidence that Hartzell et al give.

    ****AROUND is confusing Search for this and replace with something more precise

    Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals. Furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia.

    GP affects incentives in terms of QUANTITY of acquisition (likelihood), but the quality of acquisitions is negative.

    On the management issue: On a priori theoretical grounds, GPs could be argued to have both positive and negative effects on the management of a firm. On the positive side, managers could be less fearful of acquisition attempts and thereby reduce short-termism and facilitate long-term focus (Stein 1988) and encourage managers to invest in firm-specific human capital (Shleifer and Vishny 1989). On the negative side, it can be argued that by making managers less fearful of acquisitions, GP reduces the benefits associated with the disciplinary forces of the market for corporate control and leads to increased managerial slack (GIM 2003, Bebchuk Cohen, and Farrell (2009) and Schleifer and Vishny 1989) .

    *We have some scaling issues here. Volume-to-volume change represents 2 OR 3 years. But we should try and standardize this. *Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals. Furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia.

    GP affects incentives in terms of QUANTITY of acquisition (likelihood), but the quality of acquisitions is negative. *Hartzell, Ofek, and Yermack (2004) document some evidence from the mid-1990s in support of this hypothesis. They find that certain CEOs negotiate increased golden parachutes along with special cash bonuses during acquisition deals. Furthermore, they find that in such cases where CEOs receive special financial treatment the shareholders receive smaller acquisition premia.

    GP affects incentives in terms of QUANTITY of acquisition (likelihood), but the quality of acquisitions is negative. *The following is motivation for why the LT results matterOn a priori theoretical grounds, GPs could be argued to have both positive and negative effects on the management of a firm. On the positive side, managers could be less fearful of acquisition attempts and thereby reduce short-termism and facilitate long-term focus (Stein 1988) and encourage managers to invest in firm-specific human capital (Shleifer and Vishny 1989). On the negative side, it can be argued that by making managers less fearful of acquisitions, GP reduces the benefits associated with the disciplinary forces of the market for corporate control and leads to increased managerial slack (GIM 2003, Bebchuk Cohen, and Farrell (2009) and Schleifer and Vishny 1989) .

    On the results: 3. Again this is just another way to look at the changes in markets valuation of the firm, but this allows us to control for OTHER changes that are taking place at the same time, that may explain changes in Q or returns. *This is NOT a tradable trading strategy, since it uses information not available at the time of portfolio formation. We do the long-short exercise because we want some basis of comparison (i.e. the short side)This portfolio loads positively on SMB (that is tends to be smaller firms) and positively on HML (that is, tends to be high value) and negatively on Carhart (low momentum)The evidence here we find is that the initial decline is fast. This is consistent with the Q results. *This is NOT a tradable trading strategy, since it uses information not available at the time of portfolio formation. This portfolio loads positively on SMB (that is tends to be smaller firms) and positively on HML (that is, tends to be high value) and negatively on Carhart (low momentum)Note also that a problem here is that perhaps adopters also have OTHER things, such as entrenchment (E or G Index), that are driving the results. Of course we could try to control for this by doing the long-short exercise in portfolios that have otherwise identical E-GP values; but, we give Q results as a way of giving a robustness check.

    *The following is motivation for why the LT results matterOn a priori theoretical grounds, GPs could be argued to have both positive and negative effects on the management of a firm. On the positive side, managers could be less fearful of acquisition attempts and thereby reduce short-termism and facilitate long-term focus (Stein 1988) and encourage managers to invest in firm-specific human capital (Shleifer and Vishny 1989). On the negative side, it can be argued that by making managers less fearful of acquisitions, GP reduces the benefits associated with the disciplinary forces of the market for corporate control and leads to increased managerial slack (GIM 2003, Bebchuk Cohen, and Farrell (2009) and Schleifer and Vishny 1989) .

    On the results3. Again, note that this is not a tradable trading strategy since it uses information not available at the time of portfolio formation. 4. Note that this portfolio loads positively on SMB (that is tends to be smaller firms) and positively on HML (that is, tends to be high value) and does not load on Carhart (low momentum)*A priori it is unclear which theory holds; our evidence consistent with managerial slack hypothesis

    There are two causality effects here with the LT adoption results. The reason why the Q declines is, if the market knows that you have a high likelihood of acquisition, and there isnt an acquisition, then there is a disappoint. But, it could be slack as well. **

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